Question

Explain the time value of money. Is it important for managers to have an understanding of compound interest, annuities, and present and future value concepts? Why?

Answer 1

TIME VALUE OF MONEY

Time value of money is the concept/idea that money that is available at the present is worth more than the same amount at the future period, because of it's earning capacity. This concept explains that , the money will worth more at the time of it's receipt. One of the vital /important principle in the finance is thet, money has a time value, which is attached to it. It explains money in the hands at present is worth more than the future value of the same .

1. COMPOUND INTEREST : Compound intterest ,otherwise known by compounding interest is interest ,which is calculated on the initial principal. It also includes the accumulated interest from previous periods on a loan / deposits. Compound interest is the key incentive for financial institutions like; bank to lending of money and also for the depositors for investing money.   
2. ANNUITY AMOUNT : Annuity is the sum of money paid by  the insured to the insurer of an insurance company on a regular basis. It is the sum of money or series of payments made at fixed intervals . It is the fixed sum of amount paid to somone on a regular basis, as an investment for future. eg: monthly insurance payments, home mortgage payments, pension payments etc.   
3. PRESENT & FUTURE VALUE CONCEPT : PV or present value concept is the current value of a future sum of money. It also includes cash fows given a specified rate of return. FV or future value tells the dollar value that will accrue over the period of time for the invested money. Future value explains us about what an investment is worth in the future ; present value concept explains how much is needed in today's dollar to attain a certain sum of money in future .

IMPORTANCE FOR MANAGERS TO UNDERSTANDING THE TERMS OF ANNUITY, COMPOUND INTEREST & PV,FV CONCEPT

ANNUITY - Each annuity is different from the other as it has different payment options in the schemes. Differences like pay-out options, payment of premium terms, death benefit details, claiming period etc. have to be taken in to consideration. Annuity is the one , which have a potential to provide with life long earnings, even after the retirement period. Because of the same the managers have to understand the concept well to make good use of such plans to their employees and also to them.

COMPOUND INTEREST - One of the major concept of principal to understand when your finances  are managed. It can helps you to earn a higher return on your savings and investments. Compound interest is the key concept , which is uded mainly in banking institutions, because of the same such principals must have to know by the managers to deal with their customers / clients as well

PV & FV CONCEPT - It is very much needed for the managers to have a clear understanding of the terms PV & FV concepts. FV calculations allows the investors to know & predict their amount of profit that can be generated from different forms of investments also it's changing degrees of accuracy. PV is yet another term which indicates the current vaue of future cash flows. so both the concepts helps the managers to run business smoothly through taking effective managerial decisions of finances.